Hello Tishera, your post is very informative and I commend you for it. Hedging largely refers to an investment option that gives an investor an opportunity to offset potential losses. It can be concluded that hedging is a technique that is used as a risk management tool with stocks, forward contracts, swaps, and future contracts being primarily used as hedging tools ( Farid, 2015) . As you have clearly indicated hedging attempts to transfer risk in the financial world that is filled with uncertainties.
Investors in the financial world use call options to create a risk-free hedge portfolio that allows an investor to buy shares at an agreed price called a strike price. Subsequently, an investor can profit from selling the shares when the price goes down, therefore, making a profit.
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As you have noted put options are another significant way of creating risk-free hedge portfolio. Put options give stock owners the opportunity to sell a specific amount of an underlying security at a specified price within a specified time ( Farid, 2015) . Put options are valuable in the scenario that the price of the security declines. Usually, the put options provide security owners with an opportunity to reduce the uncertainty as well as the capital at risk with no significant reduction in the rate of return potential.
WACC makes reference to the weighting of a firms cost of capital. Usually, investors require that the amount of capital they have invested in a given company is paid off. As you have indicated, if the firm is obliged to pay 0.05 dollars for every dollar invested, then the company has 0.95 dollars which can be used for expansion purposes such as purchasing new machinery, increasing inventory, and acquiring buildings for expansion as well as storage.
References
Farid, J. (2015). An Option Greeks Primer: Building Intuition Using Delta Hedging and Monte Carlo Simulation in Excel .
